Supplying Nega-Watts

Language is a wonderful tool for communicating concepts, except when it impedes the transfer of important ideas. Energy efficiency might be an example of this paradox. Tom Friedman’s column in today’s New York Times addresses an important proposal concerning the incentives for utilities to invest in efficiency, and yet it repeatedly refers to efficiency as a potential energy supply, even though it clearly sits on the other side of the ledger, affecting demand. For that matter, efficiency is only a subset of the larger notion of conservation, which includes behavioral changes. To most people this probably sounds like semantics, but depending on the context, I think these are actually important distinctions.

I can see how for an electric utility, investments in improved end-user efficiency might be discussed interchangeably with investments in new power generation. Both involve large quantities of capital expended over a short period, with benefits that extend over many years. Both can be evaluated using similar analytical tools, resulting in expected returns that can be readily compared. An efficiency project—even if it’s a bundle of consumer-level improvements—can sit comfortably in a larger portfolio of mostly supply- or distribution-related projects, provided the incentives are properly aligned.

Consumers don’t think that way, however. Our household finances mainly revolve around day-to-day or month-by-month expenses, and our versions of big capital projects enter that framework in the form of mortgage, credit-card and car payments. Paying the electric bill is thus not directly comparable to buying a new refrigerator or heating-and-air-conditioning system, even if that purchase will have a direct bearing on the future magnitude of utility bills.

The logical way to bridge that gap is for utility companies that must routinely speak both “expense” and “capital” to offer consumers efficiency products that translate the latter entirely into expense terms, provided they can earn a return on this that compares to their returns on supply investments. If a home energy audit reveals that your refrigerator is an energy hog, your utility ought to be able to finance a new refrigerator at an attractive monthly rate that compares directly to the energy it saves, showing up as a line item on your monthly electric bill. I think that’s the essence of what Mr. Friedman is suggesting.

Conservation—including efficiency—remains one of our best tools for tackling greenhouse gas emissions and reducing our energy consumption. It’s easier to assess the benefits of that option if we do our energy accounting properly, keeping it clearly on the demand side of the ledger, rather than talking about "supplying efficiency." But while Americans still have ample opportunities to reduce our consumption to match better the very substantial energy supplies we still produce, high energy costs are already driving a large wave of efficiency improvements through our economy. Once we’ve saved all the energy that’s warranted by its current cost, how do we justify saving more? Including the climate externality as a direct cost will help, but that will still reach a limit, probably before we reach the engineering limits of efficiency. At some point we must decide much extra efficiency we want to buy, whether in electricity or in vehicle fuel economy.